Friday, February 8, 2008

What if Muni Insurance Disappeared?

--Firms like MBIA Inc., Ambac Financial Group Inc. and Financial Guaranty Insurance Co. write insurance on tax-exempt debt issued by municipalities, hospitals, nonprofit groups and others. If there is a default, they guarantee repayment. The same firms are in trouble because of insurance they have written on shaky mortgage-backed debt. As their mortgage woes deepen, the firms' standing in the municipal-bond market could be severely shaken.

--Roughly half of the $2.6 trillion municipal-bond market is insured by these firms. Municipal issuers and taxpayers have paid as much as $2.3 billion a year in premiums to bond insurers, according to Standard & Poor's Ratings Service. But some regulators, investors and municipalities are starting to question the value of all that insurance.

--Municipal bonds don't default much. Municipal bonds with a double-B rating from credit-rating services have a cumulative average 10-year default rate of 1.74% since 1970. That is much lower than double-B-rated corporate bonds, which have a 29.93% 10-year cumulative default rate during the same period, according to research compiled by research firm Municipal Market Advisors. Municipal bonds rated triple-B by Standard & Poor's default less frequently, at 0.32% of the time, than triple-A-rated corporate bonds, which have a 0.6% default rate over time.

--Issuers of municipal bonds with insurance traditionally can expect to pay a lower interest rate than they would otherwise have to pay, thanks to the coverage. But it has always come at a price.

--Before the bond-insurer crisis, bond insurers charged about 30% of the interest-rate savings an issuer would get. In recent months, that has climbed to about 80% or 90% as the bond insurers try to extract as much premium as possible. For the issuers, though, that has reduced the value of the coverage.